42 St. Andrew Square
Edinburgh EH2 2YE
Telephone: (0131) 556 8555
Fax: (0131) 556 8535
Incorporated: 1727 as The Royal Bank of Scotland
Total Assets: £306 billion (US$480 billion) (2000)
Stock Exchanges: London
Ticker Symbol: RBOS
NAIC: 522110 Commercial Banking; 522210 Credit Card Issuing; 522220 Sales Financing; 522291 Consumer Lending; 522292 Real Estate Credit; 523920 Portfolio Management; 524113 Direct Life Insurance Carriers; 524126 Direct Property and Casualty Insurance Carriers; 524210 Insurance Agencies and Brokerages; 551111 Offices of Bank Holding Companies
We aim to be recognised as the best performing financial services group in the United Kingdom. In striving towards that aim we are mindful of the responsibilities to shareholders, customers, employees and the communities in which we operate.
Achieving our aim while successfully balancing these responsibilities is the primary challenge. We believe that we can best respond to this challenge by remaining independent.
1692: Coutts & Company is organized.
1727: The Royal Bank of Scotland is founded.
1810: Commercial Bank of Scotland is established.
1825: National Bank of Scotland is founded.
1829: Manchester and Liverpool District Banking Company is founded.
1833: National Provincial Bank of England is organized.
1834: London and Westminster Bank is formed.
1836: London and County Bank is established; Ulster Bank is founded.
1864: Royal Bank acquires Dundee Banking.
1874: Royal Bank expands into England for the first time.
1909: London and Westminster merges with London and County to form London County and Westminster Bank.
1917: London County acquires Ulster Bank.
1918: National Provincial Bank merges with Union of London and Smiths Bank to form National Provincial and Union Bank of England; London County and Parr's Bank merge to form London County Westminster and Parr's Bank.
1920: National Provincial and Union acquires Coutts & Company.
1923: London County is renamed Westminster Bank Ltd.
1924: Royal Bank acquires Drummonds Bank; Manchester and Liverpool District Banking is renamed District Bank; National Provincial and Union Bank is renamed National Provincial Bank.
1930: Royal Bank makes two acquisitions: the Bank of England's West End Branch and Williams Deacon's Bank.
1939: Royal Bank acquires Glyn, Mills & Co.; Royal Bank, Williams Deacon's, and Glyn, Mills comprise the Three Banks Group.
1959: National Commercial Bank of Scotland is formed from the merger of the National Bank of Scotland and Commercial Bank of Scotland.
1962: National Provincial Bank acquires District Bank.
1968: National Provincial Bank, District Bank, and Westminster Bank announce that they will merge to form National Westminster Bank Plc (NatWest).
1969: Royal Bank and National Commercial merge to form the new Royal Bank of Scotland; National and Commercial Banking Group is formed as a holding company for Royal Bank and its English concerns.
1970: Glyn, Mills, Williams Deacon's, and National Bank are merged as Williams & Glyn's Bank; NatWest opens for business.
1979: National and Commercial Banking Group is renamed the Royal Bank of Scotland Group plc; NatWest gains U.S. presence with purchase of National Bank of North America.
1985: Royal Bank Group establishes Direct Line; two group subsidiaries, Williams & Glyn's and Royal Bank of Scotland, are merged under the latter name.
1987: NatWest's investment banking arm, County NatWest, underwrites a stock offering for an employment agency, leading to the Blue Arrow affair.
1988: Royal Bank Group acquires Rhode Island-based Citizens Financial Group and enters into an alliance with Banco Santander of Spain. NatWest acquires First Jersey National Bank.
1989: NatWest acquires New Jersey-based Ultra Bancorp, with U.S. holdings organized as National Westminster Bancorp.
1996: NatWest Bancorp is sold to Fleet Financial Group.
2000: Royal Bank acquires NatWest.
The Royal Bank of Scotland Group plc ranks as the leading Scotland-based banking group and the number three bank in the United Kingdom, after HSBC Holdings plc and Lloyds TSB Group plc. The group's founding bank, the Royal Bank of Scotland, was established in 1727 and was the second bank started in Scotland (the Bank of Scotland had been founded in 1695). The Royal Bank of Scotland and National Westminster Bank (NatWest), which Royal Bank acquired in 2000, are the group's two main retail banking brands and offer a full range of banking services for personal, business, and corporate customers. The group also owns Ulster Bank, which operates in both Northern Ireland and the Republic of Ireland, and Rhode Island-based Citizens Financial Group, which is the number two bank in New England, after FleetBoston Financial Corporation. Other key holdings include Direct Line, the largest provider of automobile insurance in the United Kingdom, offering life insurance as well and selling directly to consumers by telephone and via the Internet; and Coutts & Co. and Adam & Company, both of which are private banks.
Royal Bank's 18th-Century Origins
After one failed attempt, the Royal Bank of Scotland was established on May 31, 1727. The first attempt to establish the bank came in the late 17th century when Scotland tried to improve its economic position with the so-called Darien scheme. The Darien scheme was a plan to establish a Scots trading colony, designed along the lines of England's London East India Company, in Panama. With a population of only around 1.1 million at the end of the 17th century, Scotland could not hope to raise the requisite capital alone, so the scheme's architects relied on England for the bulk of their subscriptions. English investors, however, withdrew their money at the last minute when the English government realized that a successful Scottish venture could jeopardize the position of the London East India Company. Forced to finance the venture alone, the Scots raised £238,000 for the enterprise. Unfortunately, the entire sum was lost when the venture collapsed in 1699 due to difficulties with the heat, the Spanish, and outbreaks of fever.
The failure was devastating to Scotland, which had lost a quarter of its liquid assets in the disaster. Feelings ran so high against England for its lack of support that when the two countries were joined by the 1707 Act of Union, the English government deemed it wise to agree to pay compensation. The government provided for an 'Equivalent' of £398,085 (and ten shillings) to cover the Darien losses and other debts, and allowed for an 'Arising Equivalent,' which would be a percentage of tax revenue. Because only £150,000 of the promised money was actually available in cash, many Scottish creditors were given debentures bearing interest at five percent. Little of this interest actually materialized, however, until 1719, when an act was passed establishing an annual fund of £10,000 to be raised by Scotland's customs and excise.
Organizations such as the Society of the Subscribed Equivalent Debt arose in both Scotland and England to aid in collecting the interest due, to buy more debenture stock, and to issue loans to members based on the value of their holdings. In 1724 these organizations were joined and regularized by Parliament to create the Equivalent Company. By 1727 this company, which was essentially acting as a bank to its members, chose to take the next logical step and officially become a bank. It was impossible to do so in England, where the Bank of England's monopoly was firmly fixed, but the field was open in Scotland, where the monopoly of the Bank of Scotland, established by an act of the Scots Parliament in 1695, had expired in 1716. The Equivalent Company was granted a charter for banking on May 31, 1727, and was incorporated as the Royal Bank of Scotland.
The new bank opened in Edinburgh on December 8, 1727, with an authorized capital of £111,347 and a governor, a court of directors, and a staff of eight: a cashier, a secretary and his clerk, an accountant and his clerk, two tellers, and a messenger. It was a modest beginning but the new bank received a welcome boost in the form of £20,000 from the government, which chose that occasion to finally honor a commitment undertaken as part of the 1707 Act of Union, which provided for that sum to be lent out at interest for the development of Scottish fisheries and general manufacturing.
The Royal Bank learned to compete well against the Bank of Scotland and other banks as they were subsequently established. Circulation wars were an especially popular way of discomfiting the competition. At the time official government-backed banknotes did not exist; each bank issued its own, and a favorite ploy was to amass as many of a rival's banknotes as possible and present them for payment all at once, causing frequent embarrassment and occasional temporary closures. Before long, however, an efficient countertactic was mounted when competitors demanded redemption of banknotes be paid entirely with sixpences. Eventually the practice died out.
Although the tricks may have been discontinued, the rivalry among competing banks remained. By the later 18th century the struggle for dominance shifted to Glasgow, Scotland's second largest city, which was rapidly gaining prominence as a center for industry and commerce. Smaller banks had already sprung up there to satisfy new demand, and the big two, the Royal Bank and the Bank of Scotland, both Edinburgh-based, soon reacted to the threat of more competition. The Royal's first Glasgow branch opened in 1783 and the bank became deeply involved in the city's booming industries: the cotton trade, steam ships, sugar, and tobacco. Before long the Royal dominated the financial market in Glasgow; indeed, by the 1810s the bank's Glasgow trade eclipsed its business in Edinburgh.
Facing Increased Competition in the 19th Century
By the early 19th century a new threat faced the Royal and its arch-rival the Bank of Scotland. As large banking institutions whose clients tended to be big companies and very wealthy individuals, the two were perceived--and accurately so&mdash being removed from the interests of the general public. The average small customer's banking needs were served by small private banks which in turn banked with the Royal or the Bank of Scotland. The system, which struck many as unsatisfactory, was changed with the arrival in 1810 of the new Commercial Bank of Scotland, which billed itself as 'the Bank of the Citizens.' The new bank did well, having built up a branch network in Scotland of 30 banks by 1831, when it was granted a Royal Charter of Incorporation. The Commercial's success was watched with interest, and other, similar banks soon appeared, most notably the National Bank of Scotland, incorporated in 1825.
Increased competition notwithstanding, the Royal continued to thrive as the 19th century progressed. As its success in Glasgow had proved, the bank was keenly aware of the opportunities afforded by the expansion of industry: in 1826 it financed Scotland's first steam-powered railway, the first of several successful transport ventures. As the bank prospered it also expanded. By 1836 five new outlets had been established in Dundee, Paisley, Perth, Rothesay, and Dalkeith. The Royal Bank began a policy of aggressive acquisition, taking over many new branches after the 1857 failure of the Western Bank of Scotland and in 1864 acquiring the Dundee Banking Company, which had been founded in 1763. The Royal Bank also expanded its operations into England in 1874.
The Scottish banking community was shocked in 1878 when the City of Glasgow Bank spectacularly crashed: although the incident worked to the big banks' advantage (they divided the unfortunate bank's branches between them), it highlighted the need for limited liability and for a bank's accounting practices to be audited by independent, professional accountants. The Royal Bank was already protected on the first score under the terms of its charter, but the Commercial and the National made haste to register under the Companies Act to prevent a similar misfortune befalling them.
Turning More Acquisitive in the 20th Century
The Royal increased its presence in England in the early 20th century. In 1924 the bank acquired Drummonds Bank, a small but highly regarded London bank (whose clients had included George III and Beau Brummel) originally founded in 1717 by an expatriate Scotsman. Six years later the Royal acquired the Bank of England's West End Branch and also Williams Deacon's Bank, whose branch network in Manchester and the northwest provided the Royal with its first English presence outside the capital. The trend toward acquisition continued in 1939 with the addition of another private London bank, Glyn, Mills & Co. This bank and Williams Deacon's continued to operate under their own names as subsidiaries, and together with their parent the Royal Bank were known as the Three Banks Group. As the bank grew it took advantage of technology. At this time the Royal Bank introduced telephones, typewriters, adding machines, and teleprinters. After World War II the bank founded a residential banking college to train staff for an increasingly sophisticated financial world.
By 1959 banking trends clearly favored consolidation. Scottish banks needed to match the financial might of their English counterparts if they were to be able to accommodate the needs of growing Scottish industry and commerce. Accordingly, the National and Commercial banks merged to form the National Commercial Bank of Scotland, and in 1966 further strengthened their position by acquiring the English and Welsh branches of the National Bank. Three years later, however, the National Commercial Bank merged with the Royal Bank. A new holding company was formed called National and Commercial Banking Group Ltd., which included the Scottish side, the Royal Bank of Scotland, and the English concerns, Glyn, Mills & Co., Williams Deacon's, and the National Bank. In 1970 the latter came together as Williams & Glyn's Bank Ltd.
Greatly strengthened by the amalgamation, the group was ideally placed to take full advantage of the two watershed economic events of the 1970s. In 1971 the regulatory Bank of England eased restrictions on Scottish banks operating in England, allowing the Royal Bank to compete freely for the first time. The range of financial services that banks could provide was also substantially broadened. Perhaps even more significantly, the rise of the North Sea oil industry in the 1970s proved an unprecedented boom to the Scottish economy and especially to banks, such as the Royal, which were quick to recognize the tremendous potential of the new industry. Taking advantage of its newfound strength, the bank expanded its foreign interests, establishing branches in New York and Hong Kong and opening representative offices in Chicago, Houston, Los Angeles, and San Francisco. At decade's end, the group's holding company was renamed the Royal Bank of Scotland Group plc.
Diversifying and Expanding in the 1980s and 1990s
The 1980s began with the group vulnerable to a takeover. The group's board took the initiative late in 1980 of seeking a merger itself with a British bank having a large overseas presence. Talks began with Standard Chartered Bank, leading to the announcement of a merger in early 1981. Hongkong and Shanghai Banking Corporation came forward with a rival bid within days, setting off a bidding war. The bids were referred to the Monopolies and Mergers Commission, which in January 1982 ruled against both of them. In the wake of this decision, the holding company was given a full-time executive team for the first time and in 1985 the group's clearing bank subsidiaries, Williams & Glyn's Bank and Royal Bank of Scotland, were merged as Royal Bank of Scotland.
The group also adopted a more aggressive program of expansion and diversification. In 1985 the bank created the Royal Bank of Scotland Group Insurance Company Limited, a telephone-based general insurance business. The subsidiary, soon renamed Direct Line, proved a runaway success, becoming the largest motor insurer in the United Kingdom. It soon offered household and life insurance. In 1988 the Royal acquired the Rhode Island-based Citizens Financial Group, the fifth largest bank in New England, and promptly set upon a course of aggressive expansion. By late 1995, following the acquisition of a number of banks in the region, Citizens had established major presences in Connecticut and Massachusetts in addition to its home state of Rhode Island. It became the third largest commercial bank in New England with the April 1996 purchase of First New Hampshire Bank, which had been a subsidiary of Bank of Ireland. Following this transaction, Bank of Ireland held a 23.5 percent stake in Citizens.
The tremendous success of Direct Line and Citizens led to speculation in the early 1990s that the Royal would sell one or both of these subsidiaries, but the rumored divestments did not occur. In fact the subsidiaries played a fundamental role not only in keeping profits high but also in protecting the group from fluctuations: if one sector of the Royal Bank's business were to suffer a reverse, the others could carry the group for a time. Meanwhile, under the new leadership of George Mathewson, who became chief executive in 1992, Royal Bank in 1993 acquired Adam & Company, an Edinburgh-based private bank that had been founded ten years earlier.
Although Royal Bank described itself as 'conservative,' it was by no means fearful of creating and exploiting new opportunities. Its innovative use of technology was second to none in U.K. banking. In 1994 the bank introduced a 24-hour, seven-days-a-week telephone banking service, Direct Banking. Perhaps the bank's biggest coup, however, was its creation of the Inter-Bank On-Line System (IBOS), a sophisticated cross-border banking system whereby funds could be transferred nearly instantaneously from the United Kingdom to IBOS member banks in Europe. The project grew out of a 1988 alliance with the Spanish Banco Santander and as of 1994 there were 3,500 IBOS branches in five countries, with many more planned.
With astonishing rapidity the Royal diversified into new financial services, products, and initiatives. In 1994 the bank pioneered its 'finance shops,' which offered an extensive realm of mortgage and savings products to customers. The bank also placed a new emphasis on credit card services, making this an independent operation. Also, the Royal established a specialist group to finance public sector projects in 1994. The bank also captured an increasing share of the U.K. mortgage lending market, traditionally the province of the building societies (the rough equivalent of U.S. savings and loan associations).
Expansion and innovation continued in the second half of the 1990s. In 1996 the Royal Bank formed an independent offshore bank called Royal Bank of Scotland International. Direct Line expanded into roadside assistance insurance and in November 1999 acquired Green Flag, making Direct Line Rescue the number three roadside assistance specialist in the United Kingdom with nearly three million customers. In 1997 Royal Bank entered into joint ventures with food retailer Tesco PLC and Richard Branson's Virgin Group, with both ventures specializing in branded personal finance products. That same year Royal Bank began offering online banking over the Internet. The group also acquired Angel Train Contracts Limited, a rolling stock leasing firm.
In the United States, Royal Bank regained full ownership of Citizens in September 1998 when it purchased Bank of Ireland's minority holding. The following year Citizens acquired the commercial banking business of State Street Corporation, then in January 2000 Citizens acquired Boston-based UST Corp. With $28 billion in assets overall, half of which were held by Citizens Bank of Massachusetts, Citizens Financial Group was one of the 40 largest banks in the United States and held the number two position in New England--although it was much smaller than the leader, FleetBoston Financial Corporation, whose assets exceeded $190 billion.
To further expand its share of the mortgage lending market, Royal Bank pursued the acquisition of a U.K. building society, a move that had long been expected. It reached an agreement in 1998 to acquire Birmingham Midshires for £630 million but the society pulled out of the deal in order to accept a higher offer from Halifax plc. Midshires had to pay Royal Bank £5 million to gain its release from the deal. Somewhat audaciously, the Royal pursued an acquisition of the much larger Barclays Bank in 1999, during a period when that bank was without a chief executive, but this initiative was rebuffed. Later in 1999, however, the Royal Bank Group commenced a prolonged takeover battle with longtime rival Bank of Scotland, the prize being London-based National Westminster Bank. Royal Bank ended up on the winning side and acquired NatWest in March 2000.
NatWest's District Bank Roots
National Westminster Bank Plc (NatWest) was created in 1970 by the merger of three major banks all established in the early 19th century: the District Bank, the National Provincial Bank, and the Westminster Bank. The District Bank was first established in 1829 in Manchester as the Manchester and Liverpool District Banking Company, with a starting nominal capital of £3 million. The company planned to create a banking network for northwest England by opening new branches and acquiring smaller banks, and within five years had opened 17 branches.
By 1840, however, Manchester and Liverpool District Banking was forced to write off over £500,000 in bad debts--a huge sum at the time--due to management misjudgment, slowing the firm's acquisitions and expansion for the next few years. In addition, the bank was closely associated with England's textile industry; the company suffered during the cotton famine of the 1860s caused by the North's blockade of Southern ports during the American Civil War. Judicious acquisitions, however, helped the bank weather this particular storm.
At the beginning of 1885, the bank, recovered from its previous losses, opened an office in London. As customer deposits increased and astute commercial credit policies and management were put to work, the bank began a moderate expansion program that lasted until the outbreak of World War I. After a five-year hiatus, the company was caught up in the postwar boom and opened 130 new branches between 1919 and 1924. In the latter year, the bank shortened its name to District Bank.
Relatively unscathed by the worldwide depression of the late 1920s and early 1930s, the bank continued its expansion program, and immediately after World War II decided to create a network of branches throughout the country. In 1935 District Bank merged with the County Bank, a Manchester-based entity, increasing its paid-up capital to almost £3 million and kicking off its nationwide expansion. This strong-growth strategy continued unabated up to and following World War II until District Bank's acquisition by National Provincial Bank in 1962.
NatWest's National Provincial Bank Roots
National Provincial Bank of England was organized as a joint-stock company in 1833. At the time, the Bank of England had exclusive statutory power to issue bank notes within a 65-mile radius of London. Although the bank's administrative offices were in London, it decided to open its branches outside the 65-mile radius so that the bank could issue its own notes. From the beginning National Provincial lived up to its name, serving provincial customers throughout England. The bank was without a national competitor for about 60 years.
The first branch of National Provincial Bank was opened on January 1, 1834, in Gloucester. Like the District Bank, the company planned to establish new branches and acquire smaller banks, and by 1835 had opened 20 new offices. By the mid-1860s, National Provincial had acquired more than a dozen small banks and had established 122 branches and sub-branches throughout England and Wales. It finally opened a London banking office in 1866, recognizing that a presence in the world's financial capital was worth the sacrifice of its note-issuing privilege.
The bank continued to grow rapidly. At the dawn of the 20th century, the company had about 250 offices in England and Wales and approximately £3 million in capital. After World War I, the company began an accelerated acquisition-and-merger strategy. The most important of its mergers during this time came in 1918, a merger with the Union of London and Smiths Bank, itself the product of the amalgamation of two of the most venerable banking institutions in England, which added 230 branches to National Provincial's growing financial network. This merger created National Provincial and Union Bank of England, which was renamed National Provincial Bank in 1924.
Although National Provincial's growth had been interrupted by World War I, the bank vigorously renewed its acquisition program after the war. Sheffield Banking Company, Northamptonshire Union Bank, Guernsey Banking Company, Bradford District Bank, and Coutts & Company, all acquired between 1919 and 1924; North Central Finance (later Lombard North Central), acquired in 1958; and Isle of Man Bank, purchased in 1961, were a few of the significant purchases made by National Provincial. In 1962 District Bank was bought by National Provincial to create a company with over £1.4 billion in assets and 2,100 branches, although the two banks maintained their separate identities and independent operations.
NatWest's Westminster Bank Roots
Westminster Bank was organized in 1834 as the London and Westminster Bank, the first joint-stock bank in London. This firm was the first bank established under the auspices of the Bank Charter Act of 1833, which allowed joint-stock banks to be founded in London. For various reasons, the press, private banking concerns, and the Bank of England were so hostile to the Bank Charter Act that London and Westminster's management was primarily concerned with defending the company's right to exist rather than setting up an extensive branch network. As a result, the bank opened only six London branches in its first three years and no additional offices were established until nearly 20 years later.
London and Westminster made its first acquisition in 1847, when it bought Young & Son. In about 1870 it acquired Unity Joint-Stock Bank, and mergers with Commercial Bank of London and Middlesex Bank had been arranged in 1861 and 1863, respectively. By 1909 London and Westminster had opened or acquired 37 branches in and around London. Yet, despite this expansion effort, the bank felt the effects of competition from provincial banks such as Lloyds and Midland. These two banks had already established large regional branch networks and were quickly encroaching upon the London market. In order to meet this challenge, London and Westminster merged in 1909 with the influential and prestigious London and County Bank, which was founded in 1836 and had 70 offices citywide and almost 200 in rural counties. The resulting entity was named the London County and Westminster Bank.
In 1913, the bank formed a subsidiary, London County and Westminster Bank (Paris), which opened branches during and after World War I in Bordeaux, Lyons, Marseilles, Nantes, Brussels, and Antwerp. The bank itself also established offices in Barcelona and Madrid during the same time. In 1917, bank officials decided to acquire the 1836-founded Ulster Bank (which continued to operate separately), with 170 branches throughout Ireland, and in 1918 bought Parr's Bank, with over 320 offices throughout England. These purchases made London County Westminster and Parr's Bank (which became simply Westminster Bank Ltd. in 1923) the fifth largest bank in England.
During the economic difficulties of the late 1920s and early 1930s, the bank kept tight centralized control over the continental branch of the business to avoid the dangers of too rapid an expansion in unfamiliar markets, but this policy stunted Westminster's international operations. It did mean that the bank escaped the bad debts and currency fluctuations that plagued many other banks between the world wars, allowing the domestic side of the business to grow steadily. At the time of the merger with National Provincial in 1968, Westminster had 1,400 branches in England alone.
Emergence of NatWest and International Expansion: 1970s and 1980s
The merger of National Provincial and Westminster Bank, announced in early 1968, shocked the British public and banking community. In the late 1960s, the Bank of England tried to rationalize the banking industry through a policy known as competition and credit control, which aimed to put banks on a more equal and competitive footing and to improve control of the nation's money supply. Although the Bank of England indicated a willingness to allow mergers as part of the rationalization process, no one had seriously believed it would permit mergers among the largest and most influential banks.
The District Bank, National Provincial, and Westminster Bank were fully integrated in the new firm's structure, while Coutts & Company (a 1920 National Provincial acquisition), Ulster Bank, and the nonbanking subsidiaries continued as separate operations. Duncan Stirling, chairman of Westminster Bank, became NatWest's first chairman. In 1969 David Robarts, former chairman of National Provincial, assumed Stirling's position. The new company, National Westminster Bank, opened its doors for business on January 1, 1970.
In the late 1970s and early 1980s, following a massive restructuring and rationalization, NatWest began a concerted effort to expand its international operations. In 1975 NatWest expanded into Scotland, opening offices in Edinburgh, Glasgow, and later Aberdeen to support its participation in North Sea fuel projects. Under the direction of Robin Leigh-Pemberton, who became chairman in 1977, the company purchased the National Bank of North America in New York in 1979. By that year, NatWest had also extended its bases of operation in France and Belgium, had opened offices in West Germany, and had established overseas representatives in Australia, Bahrain, Canada, Greece, Hong Kong, Japan, Mexico, Singapore, Spain, and the Soviet Union.
Thomas Boardman replaced Robin Leigh-Pemberton as chairman of NatWest in 1983 when the latter was appointed governor of the Bank of England. Boardman and Tom Frost, who became NatWest's CEO in 1987, continued to transform NatWest from a domestic banking institution into an international financial organization, Part of the plan included forming NatWest Investment Bank through the acquisition of a medium-sized stock exchange jobber and a broker. NatWest also expanded its American subsidiary, NatWest USA, by acquiring First Jersey National Bank in 1987 and Ultra Bancorp, another New Jersey-based bank, in 1989. These acquisitions gave the newly named National Westminster Bancorp 285 branches throughout the Northeast and $20 billion in assets. Despite its reputation for caution, NatWest remained intent throughout the 1980s on building its American subsidiary into a superregional bank that might someday challenge the traditional dominance of the New York money-center banks.
The bank lived up to its reputation for caution, however, with its handling of the Third World debt crisis. In June 1987 it added £246 million to its reserves, becoming the first British bank to follow the lead of the American money-center banks by limiting its exposure to Third World loans.
Late 1980s and Early 1990s: Blue Arrow and Other Travails
NatWest's good name was tarnished, however, in December 1988, when the Department of Trade and Industry (DTI) began to investigate the role played by the bank's investment banking subsidiary, County NatWest, in an acquisition by the employment agency Blue Arrow. In 1987 County NatWest underwrote a stock offering for Blue Arrow to raise cash for the deal, but the results were disappointing. County NatWest was left with an interest in a 13.5 percent stake in Blue Arrow. It concealed that substantial interest by dividing the stake between itself, its own market-making arm, County NatWest Securities, and the Union Bank of Switzerland (UBS), to which it granted an indemnity against losses.
These moves were made in secret, however, to spare County NatWest the public embarrassment of a failed offering. But after the October stock market crash opened the Blue Arrow wound even further, its actions could no longer be concealed. In December 1987, County NatWest made a payment to UBS to release the indemnity, purchased County NatWest Securities' holding, and announced that it held a total stake of 9.5 percent in Blue Arrow.
The DTI released the results of its investigation in July 1989, sharply criticizing County NatWest's actions. In failing to report its stake in Blue Arrow, it said, County NatWest violated a law requiring any party holding a five percent or greater interest in a company to report that fact in a timely fashion. This served to deceive both regulators and the financial markets about the true value of Blue Arrow stock. Although the DTI report did not criticize him, Lord Boardman announced that he would retire from the bank in September, five months ahead of schedule, and two of NatWest's deputy chief executives and another senior director also resigned. Lord Alexander, the former head of the British government body overseeing corporate takeovers, became chairman on October 1, 1989.
The Blue Arrow affair continued to dog NatWest into the early 1990s. Three former executives of County NatWest were convicted in February 1992 of misleading the market by disguising the failure of the rights issue, but these convictions were later overturned upon appeal. In 1992 the DTI launched another investigation to determine whether NatWest officials had engaged in obstructive actions to impede the first inquiry, but no improprieties were found. The inquiry did, however, lead to the resignation of Frost, who stepped down from his chief executive post in March 1992 in order to devote his full attention to the investigation. His successor was Derek Wanless.
NatWest faced other difficulties during this period. In 1989 profits were dampened by provisions against possible losses on loans to less developed countries. The following year, a similar result came from an increase in U.K. loan losses. In 1991 NatWest was forced to take a bad debt charge of £1.88 billion (US$3.3 billion), an increase of 63 percent over the previous year, leading to a reduction in pretax profits of 78 percent, to £110 million (US$192 million). Adding to the gloom was the bombing of NatWest's headquarters by the Irish Republican Army in 1991.
Restructuring moves were initiated, including the reduction of the U.K. branch network from 3,000 to 2,800 and the trimming of its workforce in the United Kingdom by about 10,000 between 1989 and 1991. Also in 1991, NatWest merged its various international private banking units within the prestigious Coutts & Co. The following year, NatWest Markets was formed from the combination of the bank's corporate banking and investment banking arms, including County NatWest. Additional job cuts were undertaken, with the workforce reduced by another 7,000 employees in 1992 and 4,000 in 1993. Several noncore operations were divested: share-registrar services in the United Kingdom, retail banking in France and Australia, equity operations in Japan, and credit card merchandising in the United States. There were also some new initiatives, most notably NatWest Life, a venture launched in 1993 to sell life insurance at the bank's branches.
Late 1990s: NatWest's Final Years of Independence
Through this restructuring and by getting its bad loan portfolio under control, NatWest returned to solid profitability in the mid-1990s, posting record pretax profits of £1.7 billion for 1995. Its total assets of £169 billion made NatWest the number two bank in the United Kingdom, after HSBC Holdings. Late in 1995 NatWest reached a decision to sell NatWest Bancorp. The bank had managed to engineer a turnaround of the long-troubled U.S. unit but, with banking industry consolidation proceeding at a feverish pitch in the United States, NatWest Bancorp would need to grow considerably larger to remain competitive. NatWest decided instead to sell out while acquisition prices were on the rise. In May 1996, then, NatWest Bancorp was sold to Fleet Financial Group, Inc. for £2.3 billion (US$3.6 billion). It was estimated that NatWest's return on its 16-year investment in the U.S. retail banking market was a sorry one percent.
In the wake of the sales of NatWest Bancorp and NatWest Espana, also jettisoned in 1996, NatWest made four major acquisitions in a 12-month span. The bank acquired two investment banking firms, the U.S.-based Gleacher & Co. and J.O. Hambro Magan & Co., which was active throughout Europe. Also purchased were Greenwich Capital Markets Inc. and Gartmore PLC, a fund manager. All of these firms became part of NatWest Markets, which was being positioned to become one of the world's leading investment banks. NatWest was rocked in February 1997, however, by the revelation of hidden trading losses at NatWest Markets, whose chief executive soon resigned. NatWest's stock took a beating from these developments and from the disclosures that NatWest had approached Abbey National plc about a merger but had been rebuffed and then had initiated talks with U.K. life insurance firm Prudential plc regarding a consolidation, with these discussions falling through. Investors were becoming increasingly concerned about a lack of a clear strategy at NatWest and a perception of poor management. In a retrenchment aimed at focusing renewed attention on its core U.K. market, NatWest subsequently sold its equities businesses in Europe, the United States, and Asia, including Gleacher and Hambro Magan. Its failed foray into international investment banking led to a writeoff of £441 million (US$730 million) in 1997, helping to drop pretax profits to £975 million (US$1.6 billion).
In April 1999 David Rowland became chairman of NatWest following the retirement of Lord Alexander. Rowland had previously served as chairman of Lloyd's from 1993 to 1997. In yet another bid at expanding through a major acquisition, NatWest in September 1999 reached an agreement to acquire Legal & General Group PLC, a major U.K. insurance and pension-fund company, for nearly £11 billion (US$18 billion). Through this deal, NatWest aimed to greatly enlarge its insurance operations and gain additional opportunities for cross-selling financial products to its core banking customers. Unfortunately, the offering price was widely believed to be too high, and NatWest's share price almost immediately fell sharply. This left NatWest open to predators itself. Less than three weeks after announcing its proposed acquisition of Legal & General, Bank of Scotland came forward with a £20.85 billion (US$34.24 billion) hostile takeover bid of NatWest, despite the fact that the prey was twice the size of the predator.
In early October, Wanless was ousted from the chief executive slot, with Rowland taking over that position and his right-hand man, Ron Sandler, who had only recently left Lloyd's where he had been chief executive, being named chief operating officer. Attempting to fend off the unwanted Scottish advance, NatWest announced later in October that as part of its defense against the bid it would cut 1,000 jobs and sell off four businesses: Ulster Bank, Greenwich NatWest, Gartmore, and NatWest Equity Partners, a venture capital unit. NatWest planned to focus on retail, corporate, and private banking. In November, however, Royal Bank of Scotland stepped into the fray with a hostile takeover bid of its own, offering £20.7 billion (US$34 billion) in cash and stock for NatWest and setting off a prolonged and sometimes bitter takeover battle. With its more extensive operations in England, Royal Bank had an advantage over Bank of Scotland in the amount of cost savings it could conceivably wring out of a merger with NatWest. Finally, in February 2000, NatWest's board gave in and recommended to the company's shareholders that they accept the Royal Bank offer, which closed in March.
Royal Bank in the New Century
Moving quickly in the wake of its long sought-after acquisition of a major English bank, Royal Bank of Scotland soon sold off Gartmore and NatWest Equity Partners. Royal Bank expected to achieve annual cost savings of £1.22 billion (US$1.96 billion) from the integration of NatWest and began the process of slashing 18,000 NatWest jobs over a three-year period, including 9,000 in 2000 alone. Although NatWest no longer existed as an independent firm, the NatWest name lived on in the retail banking arena, giving Royal Bank two main U.K. retail banking brands. NatWest's corporate banking units, however, were integrated into those of Royal Bank, which was now one of Europe's largest banks in corporate financing. Royal Bank would also be operating two separate private banks, Coutts and Adam, with no plans for merging the two. The bank's management team, led by deputy chairman George Mathewson and chief executive Fred Goodwin, set an ambitious goal of surpassing Lloyds TSB Group and HSBC Holdings as the largest and most profitable bank in the United Kingdom. Toward this goal, further major acquisitions at home seemed unlikely, leading Royal Bank to remain alert for opportunities to further develop its successful Citizens unit in the United States and to expand in continental Europe.
Principal Subsidiaries: Angel Train Contracts Limited; The Royal Bank of Scotland plc; Adam & Company Group PLC; Citizens Bank of Rhode Island (U.S.A.); Citizens Bank of Connecticut (U.S.A.); Citizens Bank of Massachusetts (U.S.A.); Citizens Bank New Hampshire (U.S.A.); Coutts & Co.; Direct Line Insurance plc; Direct Line Financial Services Limited; Isle of Man Bank Limited; Lombard North Central PLC; National Westminster Bank Plc; Privilege Insurance Company Limited; RBS Advanta; RBS Mezzanine Limited; RBS Trade Services Limited; Royal Bank Development Capital Limited; Royal Bank Insurance Services Limited; Royal Bank Insurance Services (Independent Financial Advisers) Limited; Royal Bank Invoice Finance Limited; Royal Bank Leasing Limited; Royal Scottish Assurance plc (70%); RoyScot International Finance B.V. (Netherlands); RoyScot Trust plc; Style Financial Services Limited; Tesco Personal Finance Limited (50%); The Royal Bank of Scotland (Gibraltar) Limited (50%); The Royal Bank of Scotland International Limited (Jersey); The Royal Bank of Scotland Trust Company (Jersey) Limited; The Royal Bank of Scotland Trust Company (Guernsey) Limited; The Royal Bank of Scotland Trust Company (I.O.M.) Limited (Isle of Man); The Royal Bank of Scotland (Nassau) Limited (Bahamas); Ulster Bank Limited; Virgin Direct Personal Finance Limited.
Principal Divisions: Royal Bank of Scotland-Retail; NatWest Retail; Wealth Management; Retail Direct; Corporate Banking & Financial Markets; Direct Line; Ulster Bank; Citizens (USA).
Principal Competitors: Abbey National plc; Alliance & Leicester plc; Bank of Scotland; Barclays PLC; FleetBoston Financial Corporation; HSBC Holdings plc; Halifax plc; Lloyds TSB Group plc; Northern Rock plc.
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